Ringtone Catalog Distribution Licenses:  A Primer
By Les Watkins

Generally speaking, companies distributing ringtones on an ongoing basis, enter into “catalog” licenses with many music publishers.  These catalog licenses purportedly provide the ringtone distributor with all of the rights necessary to sell ringtones embodying all of the musical works owned or controlled by the music publisher concerned during the term of the license.

Other license terms, specifically those that are related to royalty accounting, may be highly problematic for ringtone distributors.  Even so, ringtone distributors oftentimes enter into these licenses without negotiating the terms of them, because they lack bargaining power, and because they are racing other ringtone distributors to market. As a result, the executed licenses include a number of pitfalls[MSOffice1] <#_msocom_1>  , which could become apparent in the context of a dispute with the licensor publisher, or a royalty compliance audit.

Careful consideration should be given to a number of specific provisions in ringtone catalog licenses, including the following provisions:

Works Covered By The License

Most catalog licenses provide the ringtone distributor with the right to sell a number of works that are “pre-approved” by the publisher for distribution as ringtones.  Typically, the works that are pre-approved are back-catalog titles, and not recently released titles by current artists, which are the most attractive ones to the consumer.  Ideally, the scope of any catalog license should extend to all of the musical works owned or controlled by the music publisher concerned during the term of the license.  But at a minimum, the ringtone distributor should have the contractual right to “update” the pre-approved list with a recently released title by means of some administrative procedure that is not overly burdensome (for example, an email exchange with a designated publisher employee).  The distributor should not be required to wait on the music publisher to update its approved list on its own initiative because many publishers do not proactively do so, and because there is no guarantee that publisher updates will include the specific titles that the distributor wants to add to its catalog.

The ringtone distributor should also conduct some “due diligence” before entering into a catalog license with a music publisher to ensure that works written by the most popular songwriters on the music publisher roster are generally licensable for ringtone distribution.  This is especially important if the distributor pays the publisher an advance recoupable from royalties upon signature of the catalog license.

Although it is customary for publishers to license only that share of a work that they own or control to any licensee, the ringtone distributor should pursue a license that applies to 100% of the works that are owned or controlled, in whole or in part, by the music publisher.  Otherwise, the distributor will be required to pursue licenses with each of the co-publishers of any work owned or controlled by the publisher before bringing the ringtone embodying that work to market; a time-consuming and difficult exercise.  Co-publishers will not be in a position to complain about the fact that the distributor does not license each share of a work from each co-publisher, if the ringtone distributor agrees with the licensing publisher to accrue royalties for the co-publishers and pay them, once the co-publishers are identified and located.

The ringtone distributor should ask the publisher to provide a spreadsheet listing all of the pre-approved catalog titles, including the percentage share of each title that is owned or controlled by the music publisher, so that the distributor can properly pay royalties to the publisher and its co-publishers.  However, a surprising number of publishers do not maintain such spreadsheets, so the ringtone distributor may be forced to manually research the publishing interests of ringtone titles that it seeks to distribute, so as to confirm that those interests fall under existing catalog licenses.
Because it is not uncommon for co-publishers to disagree over their respective interests in any musical work, the catalog license should include a representation and warranty from the music publisher that any percentage interest information provide to the distributor is accurate.  Otherwise, the ringtone distributor may find, subsequently, that it has paid royalties to the wrong party, or that it has not licensed rights from the proper party, without recourse against the publisher licensor.

Royalty Accounting Provisions

Typically, catalog licenses require a ringtone distribute to account on a quarterly basis, no later than 45 days after the close of a quarter, for all sales that have occurred during the preceding quarter. Problematically, however, ringtone aggregators, who act as “middlemen” between publishers and wireless carriers, cannot count on timely receipt of sales reports or royalties from the various wireless carriers selling ringtones in advance of the publisher royalty accounting deadlines.  Therefore, ringtone aggregators often account in arrears, and the royalty reporting deadlines of any catalog license should be adjusted to account for the lag-time, which is inherent in carrier-to-aggregator reporting. This is especially important because many catalog licenses allow the music publisher to charge interest on late royalty payments.

Some music publishers have the facility to accept electronic royalty reporting, and their form catalog licenses typically require ringtone distributors to account on an electronic basis.  Other music publishers require paper royalty reporting.  Regardless, the ringtone distributor should pay careful attention to the information that the publisher requires the distributor to report and tailor its royalty reports accordingly, from the outset of the term of the catalog license.  Although the specific requirements vary, the required information “fields” for music publisher reporting typically include: (i) the title of the work sold; (ii) the writer/composer of the work sold; (iii) the number of each title sold during the accounting period concerned; (iv) the retail price of each title sold; (v) the wireless carrier or website from which the ringtone is sold; (vi) the publisher’s unique song code for each title sold; and (vii) the total amount of royalties owed.  While some of this information may be readily available to the distributor, other information, such as the writer/composer of each title, may not be available.  Therefore, the distributor should carefully negotiate realistic royalty reporting requirements with any music publisher before entering into the catalog license, so as to avoid problems with the music publisher later on.

Mobile Music Reporting Practices
By Les Watkins

(Originally published in Smart Licensing Volume 10, Number 1. March 2006)

The growth of the mobile music industry could best be described as explosive.  By some estimates, 2005 ringtone sales generated $500 million in revenue in the United States alone.  In 2006, wireless music aggregators and carriers are rushing to market with mobile services that offer a cornucopia of offerings, including full-track downloads, video, and Internet radio.  Without question, the music business is going mobile.

Previous Smart Licensing™ articles have focused on licensing issues facing mobile music services.  Undoubtedly, smart licensing practices, as advocated in those articles, will enable mobile music services to get to market with the widest possible catalog of music at the lowest possible cost.  But acquiring a license is only a first step—the license must also be maintained, through proper accounting and reporting practices. And based on what Music Reports has learned about mobile music accounting and reporting practices so far, trouble lies ahead for many services.

At the moment, there is very little pressure on mobile music services to report properly and accurately.  One reason is that, due to the rapid decline of physical record sales, record labels and music publishers view mobile music as a “goose laying a golden egg”.  They do not want to disrupt the growth of these services, which they hope will compensate them for the decline in traditional revenue streams.

Another reason that labels and publishers currently pay very little attention to mobile music reporting is that major label and publisher accounting systems, which were designed for physical sales, are not yet capable of promptly and accurately reporting to third parties (such as recording artists and songwriters), on digital sales. These companies are now investing tremendous resources to update internal accounting systems, so that they can handle disbursements to third parties.  In the meanwhile, it is better to leave mobile music royalties uncollected, than collect them without the ability to pay out to third parties, as required by label and publisher recording and co-publishing agreements with these third parties.

But as traditional record sales continues to decline, mobile music will become a primary, instead of a secondary, source of revenue for labels and publishers.  And label and publisher accounting systems will either be modernized, or recording artists and songwriters will force labels and publishers to account on digital sales. The royalties that these third parties get for traditional sales will diminish, and they seek out substitutional income.) Therefore, the “grace period” that mobile music services currently enjoy, with regard to proper reporting, will end.  Label and publisher royalty accounting audits will ensue.  Under this scenario, the best case for mobile music services is that they will be required to pay audit settlements and re-tool reporting systems, so as to ensure accurate accountings, at significant expense. The worst case is that mobile music service licenses with labels and publishers will be terminated.

Faced with this dilemma, mobile music services are well advised to devote the necessary resources to establishing sound accounting systems, from the outset.  But the task is more difficult than it seems, due to some established business practices between wireless carriers and the mobile music services that provide musical content to them.  For example, many polyphonic ringtone licenses from music publishers require mobile music services to pay the publisher a royalty for each ringtone sold that is equal to the greater of:  Ten Percent (10%) of the retail price of the ringtone concerned; or a “penny-rate” floor of Twelve and One-Half Cents ($.125) per download.   Polyphonic ringtones, when they are sold on an “ala carte” basis, currently sell for One Dollar ($1.00) retail.  In Music Reports’ experience, most mobile music services that sell polyphonic ringtones simply account on a “penny-rate” basis ($.125 per download), and publishers do not object to this practice, because the penny-rate is more than Ten Percent (10%) of the retail price of the tone concerned (that would be Ten Cents ($.10)).

But what if the wireless carrier offers to the consumer, in the form of a charge to the consumer’s mobile phone bill, a number of “credits”, which are redeemable over time, for polyphonic ringtones? This is a common practice in the wireless music business.  For example, a carrier might offer a consumer 6 credits for Eight Dollars ($8.00).  If the consumer only redeems 1 credit for 1 ringtone, and the mobile music service pays the publisher Twelve and One-Half Cents for that ringtone, then the publisher has not participated in the effective “retail” price of that ringtone—and the publisher has a strong argument that the effective retail price of that ringtone should be Eight Dollars ($8.00)!  It will not matter to the publisher that the wireless carrier collects all of the “breakage” (in the form of unredeemed credits) and that the mobile music service does not share in it.

In Music Reports’ experience, all licenses for the use of master recordings and musical works in connection with mobile music service offerings are structured similarly to the license in the above example.  As such, mobile music services must receive “transaction-level” reporting detail from their carrier distribution partners, in order to account accurately.  A “transaction-level” music usage report includes a separate row of information for each transaction, including but not limited to:  date of transaction (e.g., download); consumer identity; musical item identity; and price of item.

Music Reports has reviewed many carrier reports and has learned that many, if not most, carriers do not currently report back to mobile music services in this manner.  In fact, it appears to Music Reports that the carriers do not even collect this level of detail—if it is collected at all, it is collected by the micropayment processing companies that sit between mobile music services and carriers.

Even more surprisingly, Music Reports has learned that carriers are not reporting using unique numeric identifiers for each musical work. Instead, carriers are reporting on the basis of song titles.  This is a methodology that is fraught with risk of error.  For example, many songs share the same title—Music Reports’s SongDex® database of musical work copyright information lists over 13 different songs sharing the title “Dreams”.  And any given song may be known by several different titles. For example, the Rolling Stones song “(I Can’t Get No) Satisfaction” is known variously as: “Satisfaction”, “Can’t Get No Satisfaction”, and ‘I Can’t Get No Satisfaction”, in addition to its rightful title.  In order for a reporting system to scale with integrity, the musical works that are reported on must be identified by unique numeric identifiers (such as Music Reports’s SongDex® ID), at each stage of the reporting chain.

Undeniably, mobile music has the very real potential of reinvigorating the faltering music business.  For example, it is reported that Cingular had almost 50 million subscribers in 2005, and very soon, each of those subscribers will have access, at their fingertips, to all of the music that is commercially available in the United States.  But for all the royalties being generated by mobile music, a significant amount is being left on the table, due to faulty accounting and reporting practices.  It is only a matter of time before pressures come to bear on these processes.  When millions of transactions are at issue, mistakes can add up.  Music Reports has significant expertise in digital royalty accounting on the scale required by mobile music services, and we welcome the opportunity of working with the mobile music industry in this area.